PLDT, Inc.

WED 21 DEC 2022

Initial thoughts on the sell-off due

to Php48Bil-capex budget overspend

BUY
TEL has lost 31% or Php117Bil in terms of market value the past seven trading days. This was
mainly due to rumors that it made as much as Php130Bil in undocumented purchase orders
the last four years.
The company will host an analyst briefing in the afternoon of December 21 to discuss the
matter in more detail. However, based on our initial computations, it seems that the sell-off TICKER: TEL
is overdone due to the following reasons:
FAIR VALUE: 1,760
Drop in share price much larger than estimated budget overrun. Based on TEL’s CURRENT PRICE: 1,190
disclosure last Friday afternoon, the said “budget overrun” is estimated to be Php48Bil.
This amount is much less than the initially rumored Php130Bil and the Php117Bil decline UPSIDE (%): 47.90
in TEL’s market value. PLDT Chairman Manuel Pangilinan also said that the value might be
slightly reduced in the coming weeks.
No fraudulent or anomalous activities found. The market is charging a significant penalty
on TEL despite the company saying that it has not found any fraudulent transactions,
procurement anomalies, or loss of assets from the overrun. TEL is also taking steps to
address the situation by suspending four key officials, assembling an internal forensics
team, and hiring a third-party auditor to search for potential cases of fraud.
Share price cheap despite factoring in potential impact. After factoring in the higher
capex, depreciation expense, and the potential increase in TEL’s debts and interest expense,
our telco core profit forecast fell by 7.8% in 2022, 11.8% in 2023, and 10.3% in 2024.
Accordingly, this lowered our FV estimate by 7.9% to Php1,760. Despite this, the stock
seems cheap, trading at only 4.4X 2023E EV/EBITDA and 8.4X 2023E P/E. The said multiples
are below those of its peers and its historical averages of 6.0X EV/EBITDA and 14X P/E.
Tower sale to help offset some of the negatives. Proceeds from TEL’s tower sales should
help cushion the negative impact of the budget overrun. Should TEL continue to set aside
part of its tower sale profits as cash dividends, this could partially offset the expected
reduction in dividends resulting from its lower core income.
Upgrading to BUY as sell-off seems overdone. Since the sell-off seems overdone, we
are upgrading our recommendation on TEL to BUY from HOLD despite reducing our FV
estimate from Php1,910/sh to Php1,760/sh after factoring in the potential impact of the
budget overrun. However, we recognize the risk that sentiment for the stock could stay
depressed in the short term while the investigation is ongoing due to concerns that more
issues could be unraveled. Investors who choose to buy the stock right now should be
prepared to withstand volatility.
FORECAST SUMMARY
Year to December 31 (Php Mil) 2019 2020 2021 2022E 2023E 2024E
Total Revenues 169,187 181,004 193,257 201,859 215,885 229,626
% change y/y 3.9 7.0 6.8 4.5 6.9 6.4
Service Revenues 161,355 173,634 185,751 194,128 207,922 221,441
% change y/y 5.9 7.6 7.0 4.5 7.1 6.5
EBITDA 84,704 93,804 98,737 101,396 108,682 115,738
% change y/y 6.9 10.7 5.3 2.7 7.2 6.5
EBITDA margin (%) 52.5 54.0 53.2 52.2 52.3 52.3
Net Income (Telco Core) 27,080 28,087 30,233 29,985 30,801 32,998
% change y/y 12.6 3.7 7.6 -0.8 2.7 7.1
Recurring Core Net Margin (%) 16.8 16.2 16.3 15.4 14.8 14.9
Core EPS (Php) 125.3 130.0 139.9 138.8 142.6 152.7
% change y/y 12.6 3.7 7.6 -0.8 2.7 7.1

RELATIVE VALUE
P/E (X) 9.49 9.15 8.50 8.57 8.35 7.79
P/BV (X) 2.30 2.23 2.09 2.13 2.00 1.86
EV/EBITDA (X) 5.03 4.69 4.92 4.42 4.40 4.13
Carlos Matthew De Leon
Dividend yield (%) 6.06 6.50 6.89 9.88 6.68 7.30 Research Analyst
ROE (%) 20.31 19.00 22.36 18.66 20.31 20.98 matthew.deleon@colfinancial.com
so urce: TEL, COL Estimates

Disclaimer: All content provided in COL Reports are meant to be read in the COL Financial website. Accuracy and completeness of content cannot be guaranteed if reports are viewed outside of the
COL Financial website as these may be subject to tampering or unauthorized alterations.
 COMPANY UPDATE I TEL: INITIAL THOUGHTS ON THE SELL-OFF DUE TO PHP48BIL-CAPEX
BUDGET OVERSPEND

WED 21 DEC 2022

Drop in share price much larger than estimated budget

overrun

Based on TEL’s disclosure last Friday afternoon, the said “budget overrun” is estimated
to be Php48Bil. This amount is much less than the initially rumored Php130Bil and the
Php117Bil decline in TEL’s market value. PLDT Chairman Manuel Pangilinan also said that
the value might be slightly reduced in the coming weeks.

No fraudulent or anomalous activities found

The market is charging a significant penalty on TEL despite the company saying that it
has not found any fraudulent transactions, procurement anomalies, or loss of assets from
the overrun. TEL is also taking steps to address the situation by suspending four key
officials, assembling an internal forensics team, and hiring a third-party auditor to search
for potential cases of fraud.

Share price cheap despite factoring in potential impact

According to newspaper reports, the main impact of the budget overrun will be in TEL’s
2022 and 2023 capex and in its depreciation expense over the next eight to nine years.
If the problem is not addressed, this would reduce the company’s core income by about
Php3.5Bil annually.

After factoring in the higher capex, depreciation expense, and the potential increase
in TEL’s debts and interest expense, our telco core profit forecast fell by 7.8% in 2022,
11.8% in 2023, and 10.3% in 2024. Accordingly, this lowered our FV estimate by 7.9% to
Php1,760. Despite this, the stock seems cheap, trading at only 4.4x 2023E EV/EBITDA and
8.4X 2023E P/E. The said multiples are below those of its peers and its historical averages
of 6.0X EV/EBITDA and 14X P/E. Finally, capital appreciation potential to our new FV
estimate is significant at 47.9%.

COL Financial Group, Inc. 2

 COMPANY UPDATE I TEL: INITIAL THOUGHTS ON THE SELL-OFF DUE TO PHP48BIL-CAPEX
BUDGET OVERSPEND

WED 21 DEC 2022

Exhibit 1: Summary of forecast changes for TEL

2022E 2023E 2024E
in PhpMil % Change % Change % Change
Old New Old New Old New
Telco core income 32,530 29,985 -7.8 34,910 30,801 -11.8 36,776 32,998 -10.3
Capital expenditures 87,358 111,623 27.8 88,367 112,278 27.1 84,148 84,148 -
Depreciation expense 53,584 56,161 4.8 57,790 61,349 6.2 61,796 65,169 5.5
source: COL estimates

Exhibit 2: Peers comp multiples

2023E
Name BBG Ticker 2023E P/E
EV/EBITDA
PLDT INC TEL PM 4.40 8.35
GLOBE TELECOM INC GLO PM 7.06 13.89
CNVRG ICT SOLUTIONS INC CNVRG PM 4.96 9.80
TELEKOMUNIKASI INDONESIA PER TLKM IJ 5.05 13.18
TURE CORP PCL TRUE TB 8.50 N/A
MAXIS BHD MAXIS MK 9.61 20.32
ADVANCED INFO SERVICE PCL ADVANC TB 7.09 18.81
TOTAL ACCESS COMMUNICATION DTAC TB 5.86 30.65
DIGI.COM BHD DIGI MK 14.72 24.43
AXIATA GROUP BERHAD AXIATA MK 5.57 17.95
TELEKOM MALAYSIA BHD T MK 5.14 13.72
Median (ex-TEL) 6.46 17.95

source: COL estimates, Bloomberg

Tower sale to help offset some of the negatives

Proceeds from TEL’s tower sales should help cushion the negative impact of the budget
overrun. TEL recently disclosed that it sold another 650 telecom towers to Aboitiz-owned
Unity Digital Infrastructure for around Php9.2Bil, bringing the total number of towers
covered by sale and leaseback deals to 6,557 and total expected proceeds to Ph86.2Bil.
Should TEL continue to set aside part of its tower sale profits as cash dividends, this could
partially offset the expected reduction in dividends resulting from its lower core income.

Upgrading to BUY as sell-off seems overdone

Since the sell-off seems overdone, we are upgrading our recommendation on TEL to
BUY from HOLD despite reducing our FV estimate from Php1,910/sh to Php1,760/sh
after factoring in the potential impact of the budget overrun. However, we recognize
the risk that sentiment for the stock could stay depressed in the short term while the
investigation is ongoing due to concerns that more issues could be unraveled. Investors
who choose to buy the stock right now should be prepared to withstand volatility.

COL Financial Group, Inc. 3

 COMPANY UPDATE I TEL: INITIAL THOUGHTS ON THE SELL-OFF DUE TO PHP48BIL-CAPEX
BUDGET OVERSPEND

WED 21 DEC 2022

PLDT, Inc. (TEL) INCOME STATEMENT (IN PHPMIL)

COMPANY BACKGROUND 2019 2020 2021 2022E 2023E 2024E

Revenues 169,187 181,004 193,257 201,859 215,885 229,626
PLDT or TEL is one of the two major % Growth 4% 7% 7% 4% 7% 6%
telecommunications and digital services Wireless 88,243 95,748 98,512 95,484 97,191 99,103
% Growth 8% 9% 3% -3% 2% 2%
procides in the Philippines. Its businesses is
Fixed Line 73,112 77,886 87,239 98,643 110,732 122,338
primarily divided into two major groups – % Growth 3% 7% 12% 13% 12% 10%
the wireless segment and fixed line segment. EBITDA 79,815 86,158 95,900 101,396 108,682 115,738
% Growth 15% 8% 11% 6% 7% 6%
Under the wireless segment, the company
Depreciation (39,656) (47,480) (52,169) (53,517) (58,704) (62,524)
operates two brands (Smart and TNT) and Interest expense (8,553) (10,086) (10,414) (11,070) (10,877) (11,344)
services around 68Mil mobile subscribers Other income (expenses) (257) 2,739 3,151 (2,724) (2,274) (1,824)
EBT 32,336 30,045 34,154 30,331 33,757 37,286
thru voice, SMS, and data-related products. % Growth 1% -7% 14% -11% 11% 10%
Meanwhile, under its fixed line network, Taxes 9,550 8,441 7,478 7,583 8,439 9,322
TEL provides landline, broadband, and fiber Net Income to Equity 22,521 21,308 26,367 22,748 25,318 27,965
Recurring Core Income 27,080 28,087 30,233 29,985 30,801 32,998
connections to majority of homes and offices % Growth 13% 4% 8% -1% 3% 7%
in the country, in addition to its international
BALANCE SHEET (IN PHPMIL)
and national call services. As of 3Q22, TEL
2019 2020 2021 2022E 2023E 2024E
currently serves 4Mil broadband subscribers. Cash 24,369 40,237 23,907 35,222 23,614 25,698
Accounts Receivable 22,436 22,053 21,790 28,149 31,303 33,296
Inventory 3,412 4,085 3,662 4,475 4,700 4,863
REVENUE BREAKDOWN Other Current Assets 25,360 21,063 24,572 28,693 29,964 31,272
Total Current Assets 75,577 87,438 73,931 96,539 89,581 95,129
PPE 232,134 260,868 302,736 283,843 327,710 339,627
11.8% Other Assets 217,316 227,540 249,661 222,399 222,987 224,182
Total Assets 525,027 575,846 626,328 602,781 640,278 658,939
Accounts Payable 77,845 82,413 99,718 95,429 98,691 98,199
37.8% ST Debt 100,815 107,759 106,113 115,998 123,938 131,813
Wireless - Data
Current Portion of LT Debt 19,722 17,570 11,482 11,854 27,931 16,628
Other
WirelessCurrent Liabilities
- Non-data 6,066 5,795 6,961 6,961 6,961 6,961
Total Current
Fixed Line - Data Liabilities 204,448 213,537 224,274 230,242 257,520 253,601
LT Debt
Fixed Line - Non-data 172,834 205,195 241,075 214,221 216,290 229,662
39.6% Other Liabilities 31,455 37,449 33,514 33,514 33,514 33,514
Total Liabilities 408,737 456,181 498,863 477,977 507,324 516,777
Equity to common 111,987 115,408 123,216 120,555 128,705 137,913
10.9% Noncontrolling Interest 4,303 4,257 4,249 4,249 4,249 4,249
Shareholders' Equity 116,290 119,665 127,465 124,804 132,954 142,162
Total Liabilities and Equity 525,027 575,846 626,328 602,781 640,278 658,939
37.8%
Wireless - Data CASHFLOW STATEMENT (IN PHPMIL)
Wireless - Non-data 2019 2020 2021 2022E 2023E 2024E
Earnings before taxes 32,336 33,021 34,154 30,331 33,757 37,286
Fixed Line - Data
Non-cash items 55,829 64,813 72,715 69,565 73,925 77,952
Fixed Line - Non-data Change in working capital (16,676) (10,510) (12,777) 16,196 1,045 (1,744)
Taxes (2,097) (2,248) (2,122) (7,583) (8,439) (9,322)
Operating cash flow 69,392 85,076 91,970 108,510 100,288 104,173
PPE (88,246) (76,503) (102,395) (111,623) (112,278) (84,148)
Dividend received 0 316 0 0 0 0
Interest received 1,723 1,106 714 390 574 385
Other noncurrent assets 2,207 6,412 (1,959) 77,000 9,706 9,706
Investing cash flow (84,316) (68,669) (103,640) (34,234) (101,998) (74,057)
Cash dividends (15,592) (16,721) (17,712) (25,409) (17,168) (18,756)
Other financing cash flow 3,979 17,184 12,808 (37,552) 7,269 (9,275)
Financing cash flow (11,613) 463 (4,904) (62,961) (9,899) (28,032)
Change in cash (26,537) 16,870 (16,574) 11,315 (11,608) 2,084
Effect of FX rate changes (748) (1,002) 244 - - -
Cash (beginning) 51,654 24,369 40,237 23,907 35,222 23,614
Cash (ending) 24,369 40,237 23,907 35,222 23,614 25,698

COL Financial Group, Inc. 4

 COMPANY UPDATE I TEL: INITIAL THOUGHTS ON THE SELL-OFF DUE TO PHP48BIL-CAPEX
BUDGET OVERSPEND

WED 21 DEC 2022

INVESTMENT THESIS: KEY RATIOS

Fixed line segment poised for growth 2019 2020 2021 2022E 2023E 2024E
TEL’s fixed line segment, composed mainly of ROE (%) 20% 19% 22% 19% 20% 21%
Mobile Subscribers ('000) 73,118 72,934 71,222 70,428 71,172 71,904
the Home and Enterprise businesses, grew
Mobile Blended ARPU 101 109 115 113 114 115
by 17.7% in 9M22 and now accounts for Home Broadband Subscribers ('000) 2,161 3,090 3,952 4,078 4,358 4,573
40.8% of total service revenues. Both Home Home Broadband Blended ARPU 1,130 1,047 1,007 992 1,071 1,123
and Enterprise segments are forecasted to Corp Data and Data Svc Revenues 24,480 25,100 26,948 31,277 36,750 42,263
lead growth in the foreseeable future driven EBITDA margin (%) 51% 50% 53% 52% 52% 52%
Net margin (%) 17% 16% 16% 15% 15% 15%
by demand for data and TEL’s improving CA/CL (X) 0.4 0.4 0.3 0.4 0.3 0.4
infrastructure. TEL is expected to maintain its D/E Ratio (X) 1.7 1.9 2.0 1.9 1.9 1.8
lead as competitors will need to invest in a Net Debt/EBITDA (X) 2.0 1.9 2.3 1.9 2.0 1.9
significant amount of capital expenditures to MAJOR CORPORATE DEVELOPMENTS (5-YEARS)
replicate TEL’s current infrastrcuture.
Reported Php48Bil in capital expenditure overruns from 2019-2022 12/16/2022
Wireless segment plateaus
Signed a sale and leaseback deal with Unity Digital Infrastructure to transfer
TEL’s wireless segment in 3Q22 declined by 12/16/2022
650 towers for Php9.2Bil
4.0% y/y to Php20.4Bil due to the inflationary
Sold 5,907 telecom towers for php77Bil to EdgePoint and subsidiary of
headwinds impating the consumer wallet 04/19/2022
edocto Group, and leaseback for 10 years
and competition lowering subscriber count. Voyager raised US$210Mil in Series C funding round, bringing Voyager's
Although mobile data revenues grew by 2.5% 04/12/2022
implied valuations to US$1.4Bil
y/y to Php18.1Bil from Php17.6Bil in 3Q22, Sold remaining 1.9Mil shares in Rocket Internet for Php2.0Bil throughout
10/31/2020
this was offset by a 15.9% y/y decline in its September and October 2020
Voice and SMS segements. TEL issues US Dollar-denominated 10-year and 30-year bonds worth
06/23/2020
US$600Mil
Attractive dividend yield
Voyager commits up to US$120Miol to support PayMaya's rapid growth 04/06/2020
TEL declared a cash divident of Php84/sh in
2021, which is equivalent to a 60% payout Partners up with AI platform, Senti AI, to create more relevant solutions 03/04/2020
ratio. Assuming that it maintains a 60%
payrout ratio and that it pays out part of the SEC approved creation of JV, Telecommunications Connectivity, Inc. between
01/22/2020
proceeds of its tower sale, we forecast total TEL, GLO, and DITO

cash dividends to reach Php133/sh this year,
translating to a dividend yield of 8.2% based
on its current price of Php1,614/sh.
JGS acquires around US$138.83Mil or 3.26% of TEL's outstanding shares
01/08/2020
(7MIl shares at US$19.7/sh)
KKR, Tencent, and IFC to infuse US$215Mil in Voyager for >50% stake 11/01/2018

Sold 7.5Mil Rocket Internet shares for Php11.4Bil 05/08/2018

Completed divestment of 25% equity stake in Beacon for Php21.8Bil 06/13/2017

COL Financial Group, Inc. 5

 COMPANY UPDATE I TEL: INITIAL THOUGHTS ON THE SELL-OFF DUE TO PHP48BIL-CAPEX
BUDGET OVERSPEND

WED 21 DEC 2022

Valuation VALUATION ASSUMPTION

Methodology DCF assumptions

Risk premium 6.5%
Risk-free rate 5.5%
Beta 0.95
Cost of equity 11.7%
Cost of debt 4.6%
Tax rate 25.0%
WACC 7.4%
Terminal growth rate 2.4%

Enterprise value 570,892

Less: Net debt -190,853
Less: Preferred shares -510
Equity value 379,529
Numer of outstanding shares (Mil) 216
Equity value per share 1,760

COL Financial Group, Inc. 6

 COMPANY UPDATE I TEL: INITIAL THOUGHTS ON THE SELL-OFF DUE TO PHP48BIL-CAPEX
BUDGET OVERSPEND

WED 21 DEC 2022

I MP OR TA NT R AT ING DEFINITIONS
BUY
Stocks that have a BUY rating have attractive fundamentals and valuations based on our analysis. We expect the share price to outperform the market in the
next six to 12 months.

HOLD
Stocks that have a HOLD rating have either 1) attractive fundamentals but expensive valuations 2) attractive valuations but near-term earnings outlook might
be poor or vulnerable to numerous risks. Given the said factors, the share price of the stock may perform merely in line or underperform in the market in the
next six to twelve months.

SELL
We dislike both the valuations and fundamentals of stocks with a SELL rating. We expect the share price to underperform in the next six to12 months.

I MP OR TA NT DISC L AIM ER
Securities recommended, offered or sold by COL Financial Group, Inc. are subject to investment risks, including the possible loss of the principal amount invested.
Although information has been obtained from and is based upon sources we believe to be reliable, we do not guarantee its accuracy and said information may
be incomplete or condensed. All opinions and estimates constitute the judgment of COL’s Equity Research Department as of the date of the report and are
subject to change without prior notice. This report is for informational purposes only and is not intended as an offer or solicitation for the purchase or sale of
a security. COL Financial and/or its employees not involved in the preparation of this report may have investments in securities of derivatives of the companies
mentioned in this report and may trade them in ways different from those discussed in this report.

C O L R E S EAR C H T EAM

APRIL LYNN TAN, CFA

FIRST VICE PRESIDENT & CHIEF EQUITY STRATEGIST
april.tan@colfinancial.com

CHARLES WILLIAM ANG, CFA GEORGE CHING RICHARD LAÑEDA, CFA

HEAD OF RESEARCH SENIOR RESEARCH MANAGER SENIOR RESEARCH MANAGER
charles.ang@colfinancial.com george.ching@colfinancial.com richard.laneda@colfinancial.com

FRANCES ROLFA NICOLAS DENISE JOAQUIN CARLOS MATTHEW DE LEON

RESEARCH ANALYST RESEARCH ANALYST RESEARCH ANALYST
rolfa.nicolas@colfinancial.com denise.joaquin@colfinancial.com matthew.deleon@colfinancial.com

CHARMAINE CO
RESEARCH ANALYST
charmaine.co@colfinancial.com

C O L F INANC IAL G R O UP, I NC.

24/F EAST TOWER, TEKTITE TOWERS,
EXCHANGE ROAD, ORTIGAS CENTER, PASIG CITY
PHILIPPINES 1605
TEL NO. +632 636-5411
FAX NO. +632 635-4632
WEBSITE: www.colfinancial.com

COL Financial Group, Inc. 7